Wikinvest Wire

Credit card changes to spur more frugality?

Sunday, January 03, 2010

Not knowing or caring what my credit card interest rates or terms have been for many years now, having paid the accumulated balance in full on a monthly basis save for one instance when an honest mistake delayed payment and both the interest charge and late fee were reversed after a pleasant phone call to the number on the back of the card (is that even possible these days?), I can only imagine what others will be going through in the new year.

Apparently, banks are now racing to levy new fees and hike interest rates where they can in order to make up for revenue that will soon be lost when the new credit card law goes into effect next month.

Reports indicate that somewhere between about $20 billion and $50 billion in lost banking revenue will soon have to be replaced as a result of the Credit Card Accountability Responsibility and Disclosure Act of 2009 and, unfortunately for the American consumer, when it comes to fees, banks can be very creative - annual fees, processing fees, statement fees, and all sorts of other fees that they probably haven't even dreamed up yet.

Probably the most outrageous example of the impact that the new bill has had on charge card terms comes via this WSJ story that you have to read a couple of times before realizing that there are no typographical errors involved.

Clearly, we are now entering a new world of even more bizarre (and mostly larger) numbers when it comes to credit cards, all of which will serve to heighten the general dissatisfaction that U.S. consumers have with banks, if not with their elected officials.

Mandatory Usury in One Lesson
How Congress dictated a 79.9% interest rate.

'You might have less-than-perfect credit and we're OK with that," read an October credit-card solicitation from South Dakota-based First Premier Bank. The interest rate, however, will strike some as usurious: 79.9%. That's a more than eightfold increase from the 9.9% the bank previously collected for a similar card.

Wait, wasn't Congress supposed to have passed legislation against predatory lending? As a matter of fact, yes. The whopping rate increase is First Premier's way of complying with the Credit Card Accountability, Responsibility and Disclosure Act of 2009. Among other provisions, that law prohibits fees of more than 25% above a card's credit limit. First Premier has been offering an account with a $250 limit and annual fees of $256. By law the latter figure must come down to $75. To compensate for the lost $181 in fees, the bank is raising the rate by 70% of $250, or $175, a year.
Already, there is talk of Credit Card Tea Parties that will likely add more unpleasant political overtones to what is already a contentious debate about the role of big banks in the U.S. during an election year.

But, more than anything else, this will probably only accelerate the pace at which Americans in general shun the "buy now, pay later" approach to their finances that has helped sustain the national economy for decades.

Of course, Washington D.C.'s "buy now, pay never" approach may someday come under attack, but probably not for a little while.

The manner in which banks make up these lost billions in fees may give "the new frugality" a shot in the arm this year. If nothing else, it will surely be entertaining to see how creative banks can be when it comes to replacing lost credit card revenue.

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Shawn said...
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Anonymous said...

The central bank's goofy policy of encouraging citizens to borrow so as to make up for "excessive" overseas savings is not sustainable in the long run. Now Ben wants the US government to borrow more to make up for private citizens not borrowing enough any more. Ben expects for force private citizens to borrow more again when the government is maxed out.

This is crazy. Stop Ben from printing. Let US citizens actually save for their future. Overseas countries can take care of their own savings/unemployment rates.

Anonymous said...

Increasingly, it seems the goal is to bankrupt the system.

Anonymous said...

The central bank does not appear to care if their policies bankrupt the nation. That is a long run problem, and they only care about the short run.

Anonymous said...

in 1980, Congress removed local state control of interest rates and usury regulations. if Congress really cared about the 2/3's of the consumer spending economy, they would repeal federal usury controls and revert back to state control. in Oregon the maximum interest rate would then revert to 15.0%. Congress and the president are so disinterested in consumers and citizens of this country.. they keep surfing the 'unintended consequences' wave, pretending they don't apprehend the 'consequences'... Probably until we get the campaign money out of the system, the future is preordained... or somehow coerce congress to adhere to the best interests of the constitution, the country and her constituents...

- Disgusted.

Victoriamabel said...

This is the only rational use of a credit card, as more convenient than checks. I delude myself that the float on a credit card is more valuable than a debit card in these times of near zero deposit rates. I have been receiving a lot of T&C mail from VISA lately, which tells me some new legislation is about to take effect.

credit information

Richard said...

Great article! Thanks a lot! Also thanks to Victoria for sharing

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